How to Recession-Proof Your Finances
After the last major economic downturn, hearing that the next recession might be around the corner (or already in our midst) can feel unsettling. Despite the buzz of impending recession fluttering across the media, the reality is that so many factors simultaneously influence the U.S. economy no one can truly predict its timing.
The mystery of the unknown — when the recession will hit, how long will it last, if it’ll even reach our doorstep at the same magnitude as the Great Recession — can be problematic. But like any crisis, whether due to a natural or economic disaster, preparedness is what can help you ride it out.
Making a few key choices now to recession-proof your finances may keep you above water if you’re worried about an economic downturn headed our way.
1. Scale back on extras now
You may have heard the saying, “the higher up you get, the farther you have to fall”. In a way, that expression is also true of your lifestyle during a recession. If you’re accustomed to spending lavishly in your day-to-day, you may feel the impact of a recession hit your wallet harder.
Instead of waiting for an economic crisis to justify cutting back on extras, do it preemptively. Do you have a membership at a coworking space you rarely visit? Maybe you can downgrade the tier of your clothing subscription to save $50 a month. Whatever these non-essentials are for you, find ways to lessen costs or drop them from your expenses, entirely. This frees up more cash to prepare for a recession
2. Build a full emergency fund
Getting ahead of financial struggles during a recession relies heavily on how much cash you’ve reserved beforehand. The more runway you give yourself to aggressively reach a fully-funded emergency fund, the more financial security you’ll have to fall back on in the event of recession-induced job instability.
“If you think we’re heading into a recession and you want to be extra safe, then you may increase your emergency savings to 8 months or longer,” suggests Shannon McLay, founder of The Financial Gym. Having enough to cover your expenses for eight months can help you get through an economic downturn. If you’re self-employed or have your own business, consider pushing your emergency savings further to withstand a year during a recession.
You can start by opening a high-yield savings account that earns you slightly higher returns compared to a basic savings account, but also keeps your deposits liquid if you need to withdraw cash, quickly.
3. Pay down debt
The last thing you need on your plate during a recession are debt roadblocks. In addition to working toward padding your emergency fund, check in with your debt, including loans and credit cards.
You can try taking a dual-pronged approach by simultaneously putting a little cash in your savings account while making extra payments each month to chip away at your debt balances. If you operate better with a more focused approach, you might hit milestone savings goals first, like working toward your first $1,000 in your rainy day fund. Then, direct any extra money toward aggressively paying off your highest-interest credit card.
As much as it’s tempting to put all of your efforts to prepare for a future downturn, don’t forget about the debt that’s affecting your financial health, now.
4. Acquire “recession-proof” job skills
A common effect of a major recession can be job instability and job loss. Finding a recession-proof job can feel like encountering a unicorn, but a way to stay prepared is picking up opportunities today that give you an edge, professionally. Consider looking into that extra certification or specialized training you’ve been thinking of doing or learning a new skill to help you stay marketable during a recession.
If you’re faced with a distressing job loss, you’ll at least set yourself up as a prime candidate elsewhere. Adding additional expertise to your resume can also be helpful if you decide to pick up a side gig while looking for long-term employment.
5. Revisit your life goals
As you’re figuring out how to prepare for a recession, an important part to not overlook is your life goals. This includes short-term goals one or two years from today, or long-term goals 10 years from now and beyond.
When the threat of economic crisis surfaces, making impulsive money moves is common. Some might jump at the suggestion to sell off their investments or reallocate their assets, for example. Don’t let the panic derail you from your big picture.
Instead, reassess what your life goals look like right now. When are you planning on buying a home or starting a family? When would you like to retire? When do you actually need this money?
“If your life goals are between two and five years, then you may want to think about a more conservative asset allocation, depending on your risk tolerance,” says Shannon. “However, if you’re life goals are beyond five years out, then the best thing you’re going to do is avoid looking at your statements, watching CNBC, and doing anything rash like selling at the wrong time.”
Preparing for the next recession
Anticipating an economic downturn can force your focus on your self-preservation now, but don’t forget that the future you also needs financial stability. It may have taken six years for the economy to rebound from the Great Recession, but on average, recessions last about eight months.
In those eight months, you’ll have been better off by planning ahead for a recession and staying focused on the parts you can control. If you’re still unsure about how to get started, reach out to a financial coach to see how they can help you get on a plan that feels right for you.